Don’t Waste Your Tax Refund!

January 25, 2017

Your tax refund. Everybody wants a piece of it. Brace yourself for a bombardment of advertising telling you how to spend it. Big screen TVs. New cars. Vacations. All the latest toys. Your refund feels like free money, so you feel like you can splurge a little with it. Don’t fall for it. Remember, your refund is just the amount that you’ve overpaid in taxes throughout the year. So technically your refund is the portion of your income that just got to your bank account late. So treat it with the same attitude you treat the rest of your income. You worked just as hard for it.

Of course, financial pros like to argue that you should arrange not to get a refund at all. By overpaying taxes throughout the year, you are essentially giving the government an interest free loan. Instead, you should adjust your payroll withholding to match your actual year-end tax owed. This is a valid point, although relatively insignificant in today’s low-interest rate environment. And regardless of what pros say should happen, the majority of people aren’t going to bother adjusting their withholdings and will continue to receive a refund (over 80 percent last year).

So if you’re part of the majority that will still receive a refund, what should you do with it? Spend it wisely. If you’ve spent much time reading my blog, you know that I’m not going to tell you exactly what to do with it. It’s your money, not mine (although if you really don’t know what to do with it, you can make it my money). Just don’t spend it on an impulse purchase because you feel like its free money. And don’t go crazy over it just because you haven’t seen a thousand dollar check for a while.

Consider your goals. Perhaps your retirement account or emergency fund could use a boost. And maybe you do need a new (or new used) car, or a vacation! If you’ve intentionally planned for your tax refund to act as your vacation or car savings, that’s just fine. Just do it because it fits into your broader budget, and not because you got sucked into it by impulse and advertising.

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Comments

I genuinely didn’t know that you could not overpay in taxes. The biggest thing that bothers me about this time of year, more so than Christma, is people who say “Oh I’ll buy X, Y, and Z with my tax return” Sometimes over spending it putting them in a worse spot than if they had never gotten the check in the first place.
The reverse way to look at this is to make sure that you don’t forget to budget for Taxes. If you underpay or run your own business, make sure to budget, so you can pay the tax when it comes in April instead of being struck with an unexpected expense.
Thanks for giving us all a friendly reminder to be wise with our tax return!

I hate when I get too much back on my taxes. I feel like each year I am trying to optimize my W4 so that I receive less and less. With my income and some of my deductions changing from year to year it’s been hard to pinpoint it.

With that said, we normally use our refund to bulk up savings or invest. Nothing too special for us.

Yup, some people hate the thought of giving the government an interest free loan and others view it as a convenient savings plan. I guess I fall somewhere in between- I’d rather not give the government an interest free loan, but given low interest rates and the amount of time I’d spend tweaking w4s, I just let sleeping dogs lie and take the refund I get.

I actually love tax refunds, I set my W-4 to single rather than married and I ask them to withold an extra $50 from each check. I know that if I had that money in my paycheck I am more at risk to spend it. When I receive it at the end of the year I use a small portion to buy large ticket items of need that we have been holding off on getting.Like this year we need a new couch because ours is torn to shreds. The rest of the funds I invest in a lump sum into something with a high rate of return, like LendingClub or RealEstate

For the last few years, our tax refund has always gone towards building our emergency fund. Before that, it would go straight towards our debt! This year, it’s going towards funding our 4 vacations! I try to get my refund down as much as possible but we like to err on the side of the refund versus having to pay in!